Paragon Commentary

Futures File: Corn & Natural Gas Rise

May 18, 2018

Global Corn Shortage Looms

Corn prices for this fall’s harvest continue to trade for $4.20 per bushel, near a two-year high. Prices are being supported by drought and crop shortfalls in China, Brazil, and Argentina. While the United States is the king of corn production, these countries are next in line, and together account for almost a third of global supply.

Meanwhile, global demand for corn has been rising, primarily due to corn-based ethanol use. The U.S. has been increasing ethanol production to sell abroad, and China is rapidly expanding its own ethanol production facilities, with production expected to increase by 25% in just a few years, soon rivaling U.S. fuel ethanol generation.

In the U.S., there is still a near-record large stockpile of corn after five years of bin-busting harvests. However, farmers likely planted fewer corn acres this year, which, when coupled with rising foreign demand, could lower U.S. stockpiles to the lowest level in five years next summer.

The global issues are making an ideal setup for Midwestern farmers, as prices are rising at a time when they have large stockpiles and low fear of weather problems in the Corn Belt this summer, giving them potential for a profitable year.

Natural Gas Balloons to New High

Natural gas billowed to a three-month high this week, trading for $2.87 per million British thermal units on Friday. U.S. stockpiles of the fuel have fallen by 35% over the last year, driven by rising exports and stagnant production.

Longer term, the United States is working to export more of its natural gas, giving countries in Europe and Asia an alternative to being dependent on Russian natural gas. Exports of liquified natural gas, which can be transported by ship, are expected to increase fivefold during the next two years, accounting for over 10% of all U.S. production.

These exports will be good news for our foreign allies as well as major U.S. gas drillers, who span the United States from Pennsylvania to Wyoming, but rising sales to foreigners could raise prices for U.S. consumers who could see higher electricity and winter heating bill costs.

Looking ahead, the next few weeks are expected to be warmer than average across much of the United States, boosting demand for air conditioning. Rising electricity usage increases demand for natural gas, which fuels 32% of all U.S. electricity generation.